BLOG

European industry is under threat from massively growing uncertainty. Trade tariffs, technological disruptions and fast-moving competitors on digital steroids cut deeply into predictions about business development. German managers report that their decisions can’t keep up with the pace of change in their business environment; they feel as if they have lost control. Uncertainty is so pervasive that it turns their former strengths, namely meticulously planning, organizing and controlling resources for highly efficient value creation, into a fundamental weakness.

Mainstream management practices aimed at intensifying the levels of planning and control don’t work in conditions of high uncertainty. In fact, they often lead to analysis paralysis, making the situation worse while the business environment accelerates away. In today’s dynamic markets, they appear as outdated as Soviet-type economic planning.

If managers cannot overcome their predisposition for detailed planning and control, this habit will kill European businesses more reliably than anything competitors or customers might do. In the face of the kind of uncertainty businesses experience today, established best-practice management has no answers. Budgeting, accounting, resource allocation and reporting practices still work in yearly cycles, rendering rapid reallocation of resources to emerging business opportunities next to impossible. Current governance norms rule out engaging with risks that appear to be unpredictable. Together, these practices make it impossible to adapt to new customer needs fast enough, spelling death for innovation. We need to reinvent them for the more dynamic and uncertain world opened up by business ecosystems.

Companies like Haier and Amazon have already demonstrated that it can be done, developing new management and governance practices aimed at creating highly dynamic structures inside their companies. This approach has transformed their companies step by step into open ecosystems where market-based structures fluidly balance available resources and capabilities with customer needs. Now their internal dynamism is so great that structures and business operations can rapidly adapt to emergent customer and market needs.

Business ecosystems such as theirs are built on principles of local autonomy, redundancy, diversity and constant experimentation. They use management and governance practices very different from those of mainstream management. Comparing their decision-making processes illustrates the differences.

In business ecosystems, the majority of decisions are made at the edges, at the point with the biggest impact, usually very close to customers – especially in uncertain or new situations. Governance models ensure that decisions in these ecosystems can and are always made as close to the edges as possible.

This is very different from today’s management mainstream, in which all but the most trivial decisions are concentrated at the top of hierarchies, far removed from customers. Only top management is permitted to take decisions involving risk. Unfortunately, in dynamic situations such as those we increasingly experience today, this course simply leads to paralysis.

Business leaders cannot hope to compete in and with dynamic ecosystems unless they take steps to make their own companies much more adaptive. The secret is to give up control at the edges, and to learn from constant experimentation how to make the most of each new challenge and opportunity.

This article is one in the Drucker Forum “shape the debate” series relating to the 11th Global Peter Drucker Forum, under the theme “The Power of Ecosystems”, taking place on November 21-22, 2019 in Vienna, Austria #GPDF19 #ecosystemsIt was first published on the GPDF Blog

New event format accelerates build up of business cooperations.

Business opportunities in Israel, the possibility to meet high tech startups from Israel and to initiate business cooperations with them – this attracted international investors, companies from southern Germany and the Israeli Ministry of Economy and Industry to the urbanharbor in Ludwigsburg on June 7th. Organized by the strategic innovation consultancy co-shift, six automotive startups pitched their innovative products. The newspaper Stuttgarter Zeitung covered the event in detail.

Participants were delighted with the innovative event format: Pitching sessions, inspiring keynotes and live cooking contributed to a very open exchange and networking. The unique location of urbanharbor created a relaxed atmosphere that made it easy to discover the persons behind the presented ideas and products. Conversations soon went beyond the presented topics and obvious cooperation opportunities. The investors motto “Invest in people, not ideas” proved to be true all the more for cooperations between businesses.

The event series will be continued on November 20, 2018 with the event “Digital.Business.Innovation.“, focussing on Cybersecurity, IoT, Manufacturing and Automotive. Registration for investors, startups and companies from southern Germany will open in July. Stay tuned.

Amazon today dominates markets like Genghis Khan’s armies dominated battlefields some 800 years ago. Back then, Mongolian troops could shock and awe their enemies like nothing else. Today, similar feelings creep up spines of business owners when they hear how Amazon buys Whole Foods, or how General Electric bows to the lure of Amazon Web Services.

The eerie feelings have the same origin: Like the Khan’s armies, Amazon displays speed, flexibility and coordination of their forces on a much higher level of performance than anyone else can dream of achieving. Studying Amazon, I realized that the similarities with the Khan’s troops go even deeper than that. At the heart of both organizations lie operations that excel at dealing with opportunity.

Quickly act on opportunities

The Khan’s army was organized and trained for interoperability and independency at all levels, starting from units of 10 men all the way up to 10.000 men. Acting mostly independently, but always in close alignment with adjacent units, commanders could deploy multiple units of varying size and specialization to act on the tactical as well as the strategic level with force, speed and purpose. Similarly, Amazon can very quickly pull together resources and start new business operations. Its broad presence in many markets, and its wide array of business and technological capabilities facilitates acting on many different opportunities. More importantly, and similar to the Khan’s army, Amazon pushes decision-making down its chain of command, expecting local leaders to take entrepreneurial risks with full profit-loss accountability.

Quickly adapt and reconfigure operations

The Khan’s riding archers were masters in mobile warfare, fluidly adjusting to new circumstances, emerging threats and opportunities. Being only lightly armored, they would never attack a target head-on, but surprise enemies with speed and maneuverability far above the enemies capability to effectively react. Similarly, Amazon’s speed and diversity of operations allows it to repeatedly surprise markets with the quick launch of businesses in new markets. Relying on software to connect their independently operating professional services, Amazon can easily combine the necessary capabilities for any business operation. Additionally, it can quickly scale operations up and also down, mitigating risks that are usually associated with underperforming operations.

Quickly become aware of new opportunities

The Khan had a courier communication and espionage network delivering military and trade intelligence that few foreign kings could even imagine at the time. Army commanders were given broad freedom how to carry out their missions, trusting their local judgment of situations and the intelligence provided from their own scouting operations. Similarly, Amazon uses its deep knowledge of consumer behavior, its vast array of connected operations across many markets, and the judgment of their customer-facing business units to spot new opportunities. Paying no heed to hierarchies and existing structures, Amazon expects every employee to point out inefficiencies, issues reported by customers and ideas for new business. Using its flexibility and presence across markets, Amazon can quickly start probing market reactions before committing significant resources to a promising business idea.

In case of the Khan’s armies, their overall agility made them dominate battlefields of the 13th century. Will history repeat itself, making Amazon’s agile business operations dominate markets in this century? Analyzing Amazon’s strengths and their disruptive ventures into established markets is the best advice I can currently give to business leaders. They need to learn to think and act like Amazon to survive and profit in highly dynamic markets brought along by digitalization.

“This must-read equips leaders with game-changing knowledge and conceptual approaches for the future of business.”

“The book does not just add to the number of publications arguing businesses must become radically more adaptable and innovative than they are today. It is also a “how to” guidebook on making those changes – and the best one I have read to date.“

Innovate! Innovate! Innovate! This mantra of Silicon Valley is fast becoming the new rally cry of corporate executives. Each new wave of digitalization speeds up business cycles and opens new opportunities, bringing in new competitors and hordes of startups that individually or as a pack rip out juicy pieces of long-defended business models. When profit margins are already low, this can fast turn into an existential threat for the incumbents. Innovation strategies are a good course of action to again secure higher margins, but today, innovation needs to happen much faster than corporate structures are able to deliver them.

In increasingly desperate attempts to keep up in the innovation race against digital giants like Amazon or Alibaba, corporations therefore try to innovate outside the confines of corporate structures and procedures. Investments in startups, digital labs and innovation incubators are the new pet projects of corporate executives.

This trend now has continued for some years, and we have participated in these corporate innovation efforts ourselves. We also closely observed similar initiatives, and spoke with many incubation teams during all phases of their innovation lifecycle. It’s time to take a look at the bottom line: How effective are corporate incubators in delivering innovation that is valuable for their sponsors?

The Good

Corporate incubators are good at attracting innovators and creative people. Outside of the sponsoring corporation, they can easily develop a culture that fosters ideas and experimentation. The extent to which they can deliver valuable innovations depends on the support, mentoring and freedom they receive through their corporate sponsors. In the best case, incubation teams are able to come up with innovative ideas that fit to existing business capabilities and business models of their sponsoring corporation. This type of innovation can easily be transferred from the incubator to the corporation. The corporation can then use its existing structures and large resources to rapidly exploit the new business opportunities at scale. We have so far observed only very few cases where this worked well, one of them being kloeckner.i.

The Bad

The chance of successfully transferring an innovative business opportunity from an incubation team to their sponsoring corporation is really slim. Corporations massively underestimate the necessary preparation efforts on their own side: They need to closely supervise startups to ensure that innovations later fit to corporate structures, business capabilities and procedures. And they need to prepare structures, adapt existing and possibly build up new business capabilities inside their corporation to rapidly support and scale innovative business opportunities. We rarely saw this happening. In most cases, the incubation teams delivered innovations that turned out to be incompatible with the sponsoring corporation. Value streams, customer experiences and business capabilities developed in incubation teams could simply not be sufficiently replicated inside the sponsoring corporation. Collaboration between the incubation teams and the corporation is a prerequisite for successful transfer and scaling of their innovations. This collaboration is hard to achieve, when the biggest barrier is exactly the main factor that sets incubation teams apart from corporations: Their culture of innovation. They need to do things differently, and in the process alienate themselves from their supposed co-workers in corporations. It is a systemic risk associated with all corporate incubation efforts and the main reason for weak results.

The Ugly

Weak results lead to frustration on all sides. Employees toiling in the corporation envy colleagues working in incubators for their freedom, high-level attention and support. Their managers have to deal with this frustration. On top of that, exotic requests of the incubation teams distract them from their real business, making their job more difficult. On the other side, incubation teams realize time and again how great ideas and valuable business opportunities slowly die in the sponsoring corporation. Corporate managers slice and dice them until nothing is left. The frustration of the innovators can become so big that they leave the company. We have seen it happening in dozens of cases. Highly motivated, highly educated, skilled and creative employees leaving companies because these were structurally unable to live up to the innovative aspirations that they inspired in their work force. The brain drain associated with this exodus of creativity is bad enough. Far worse is the unspoken message associated with each such departure. It is simple, and instantly understood by all employees: DON’T DO INNOVATION. At this point, corporate incubators achieve the opposite of their intent. They weaken the innovative strength of a corporation.

To put it in a nutshell: The success of corporate incubators does not depend so much on their own performance, but much more on the efforts of their sponsoring companies to prepare themselves for innovation. Key is a culture that embraces new ways of doing business, and leadership that carefully directs employees to adapt.